A Post-Brexit Britain Offers Silver Linings for Diageo, BAT

As the UK's vote to leave the European Union threw the country’s financial markets into a tailspin, a few British companies managed to sidestep the onslaught.

In contrast to airlines like EasyJet Plc and real-estate brokers such as Foxtons Group, whose shares plunged Monday, companies like distiller Diageo and cigarette giant British American Tobacco have so far weathered the crisis.

It’s a trend that’s set to continue as the pound’s decline, which continued Monday, knocks down prices of UK goods and assets, making them more affordable to consumers and investors with dollars, yuan or yen to spend. While analysts say inbound investment could suffer because of Brexit-related uncertainty, the weaker currency could also create opportunities for overseas shoppers and help some U.K. companies that sell abroad.

“There is a silver lining in the events for some Europe and UK-based companies,” analysts at HSBC said in a note. Added Societe Generale: “Growth and high-quality segments like consumer staples should be relatively resilient in this market environment.”

‘Strongest Economy’

Investors were scrambling for safety Monday after a market rout Friday, with the pound falling a further 3.7 percent and the U.K. benchmark stock index sliding by an additional 2 percent. Chancellor George Osborne tried to stabilize markets, saying in a speech that “Britain has the strongest major advanced economy in the world,” but executives warned of years of uncertainty.

In the run-up to the vote, many business leaders -- including Diageo Chief Executive Officer Ivan Menezes - argued against leaving the EU. After the Thursday referendum, almost two-thirds of respondents to a survey by the Institute of Directors, a UK business group, said the result would be negative for business. But individual bright spots could ease the blow.

The UK, which posted a record current account deficit of 32.7 billion pounds for the fourth quarter, is not an export-led economy, so beneficiaries of a weaker pound are limited to selected companies and industries.

Diageo, the biggest producer of the UK's largest food or drink export, scotch whisky, generates more than 90 per cent of sales outside the U.K. The company’s shares have risen more than 5 percent since the vote.

“The market does seem to have identified Diageo as the key beneficiary of Brexit,” Mirabaud analyst Jonathan Fyfe said in a note Friday.

Cigarette maker BAT’s shares rose 1.6 percent Monday after a 2.6 percent gain Friday. London-based BAT reports its results in sterling yet it gets less than 2 percent of sales from the UK, estimates James Bushnell, an analyst at Exane BNP Paribas, so its international revenue will be worth more when converted into the UK currency.

Cigarettes, Tourism

In addition, “tobacco remains perhaps the most defensive part of both consumer staples and the market and has proven its ability to grow through all economic cycles,” Bushnell said in a note Monday.

For tourism, a weaker pound is a mixed bag, helping visitors to the U.K. but making vacations more expensive for Britons. With the pound at a 30-year low against the dollar, the UK – never known as a bargain destination – may begin to look more affordable to Americans, the world’s largest group of tourists. The same is true of Japanese travellers; a year ago, it took about 195 yen to buy one pound, compared with about 135 yen on Monday.

In addition to EasyJet, British Airways owner International Consolidated Airlines Group has issued a profit warning in the wake of the referendum, citing a drop in travel demand and the slump in sterling. But hotel operator InterContinental Hotels Group rose 1.3 per cent Friday before slipping Monday.

A weaker pound could help UK luxury fashion provider Burberry Group Plc, which gets more than 60 percent of its revenue from Asia and the Americas. Its shares climbed 1.5 per cent Friday before sliding Monday. A 10 percent drop in sterling could add as much as 90 million pounds to Burberry’s pretax earnings, estimates John Guy, an analyst at MainFirst Bank AG.

Food Costs

The outlook for retail in U.K. was clouded even before the vote by the recent collapse of department-store chain BHS and clothier Austin Reed, but some bricks-and-mortar retailers could be insulated.

A weaker pound should lift the value of grocer Tesco’s international businesses, which accounted for almost one-third of its profits last year, according to James Anstead, an analyst at Barclays. Other analysts said an increase in costs of imported food could lift profits at Tesco and other U.K. grocers, if they can pass along higher prices to consumers.

Even U.S. presidential candidate Donald Trump said he saw benefits from a weaker U.K. currency.

“If the pound goes down they’re going to do more business,” he said on a visit to Scotland last week. “Let’s see what the impact of that is. I think you’ll see a lot of activity."